Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

More about the price war in oil – #12

A few more articles about the global price war underway in the crude oil market. My guess? This will not turn out as well for OPEC as OPEC expected.

A commenter at Million Dollar Way has some optimistic contrarian thoughts: A Reader’s Perspective on the Bakken in the Face of Plummeting Oil Prices.   Gloomsters are apparently starting to think the N.D. economy will collapse. For a few contrarian ideas, consider the following:

  • Projects underway include two fertilizer plants and a huge plastics plant.
  • Catch-up work for infrastructure is a $1B, yes billion, to do list.
  • Oilfield workers are very flexible and highly productive. They could start a new job in a new industry tomorrow morning and be quite productive by lunch. (Application: there could be a good supply of workers available in the next few months to start immediately on that $1B construction backlog.)
  • Innovation and investing isn’t going to stop for a minute.

My biased, wild guess? After OPEC blinks and prices go up a fair amount, North Dakota will be stronger than in mid 2014. I don’t think that is what the various oil ministers are betting on.

1/16 – Forbes – When Will The Price of Oil Hit Bottom? The Market is Looking at the Wrong NumberThere is a massive difference between the average price of producing something and the incremental price, or marginal price. If the revenue for the next unit is greater than the marginal price, then it makes sense to make another unit, even if on the basis of average price you lose money.

This is a big deal in oil right now. This article is the first I’ve seen that makes this point.

Author’s sources suggest marginal cost of production in the Bakken is around $30. If crude is above that, it makes sense to keep producing. Concessions from distressed vendors might drop the marginal cost of production even lower.

I’ll make a totally wild guess that the marginal cost is much lower today, perhaps $15 or $20.

I think it will take a lots deeper drop in price before substantial amounts of Bakken wells are closed in.

Before huge amounts of Bakken oil is pulled from the market, a lot of OPEC countries are going to be in exquisite agony. Might even be a few oil ministers and finance ministers out of a job.

1/21 – Bloomberg – OPEC Will Blink in Battle With U.S. Shale Drillers, Poll Shows – Survey of traders and analysts shows slight majority think OPEC will blink first in the price war they started. When? Of those who think OPEC folds first, 58% say second half of ’15 and 31% say first half and 3% say first quarter.

1/18 – American Interest – OPEC Sees Market Share Sliding in 2015 – OPEC expects its production to drop slightly in 2015 by around 1M bopd from current levels. Expectations in various articles (which I agree with) is that US shale oil drilling will drop a lot but production will increase slightly for the year.

So how is this price war going? National budgets in the OPEC country are getting slammed, their production will drop a bit, shale production will increase only slightly. Perhaps not such a good deal?

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